Gas price hike could hit fert subsidy plan

SummaryThe C Rangarajan committee’s proposal to nearly double the domestic price of natural gas, if implemented, could adversely affect the government’s subsidy reduction plan and make the new urea investment policy “redundant”, is the thinking at the ministry of chemicals and fertilisers.

The C Rangarajan committee’s proposal to nearly double the domestic price of natural gas, if implemented, could adversely affect the government’s subsidy reduction plan and make the new urea investment policy “redundant”, is the thinking at the ministry of chemicals and fertilisers. The administrative ministry for the fertiliser industry, whose output is sold at heavily subsidised prices and through whom the subsidy is currently routed, has written to the finance ministry to assess the budget implications of the panel’s proposal before taking a call on it.

If the Rangarajan committee’s views are accepted, the gas price would be around $8 per mmBtu (exclusive of transportation charges and marketing margins), compared with $4.20 at present. Sources said that the fertiliser ministry has contended that such a price won’t be viable for the fertiliser industry, which needs to add capacities to keep pace with the rising demand for fertilisers.

Basically, the fertiliser ministry wants the finance ministry to give clarity over the subsidy structure before the gas price is revised. It has estimated that a $4 per unit increase in price of gas would push up the cost of urea by R5,200 per tonne, and the annual fertiliser subsidy bill by around R10,000 crore at current (subsidised) retail prices for urea. Gas accounts for over three-fourths of the cost of production of fertilisers. A proposal to decontrol retail prices of urea has been hanging fire for long due to political sensitivities while there have been protests over the spike in prices of the two other fertiliser classes (phosphatic and potassic) that were decontrolled in April 2010.

The proposed new urea investment policy aims at facilitating investments to the tune of R35,000 crore in fresh urea capacities.

The proposed new urea investment policy aims to reduce the country’s dependence on imported urea, which is far costlier (the current import price of urea is around $ 380 per tonne). According to the fertiliser ministry, if the price of gas is hiked as recommended by the Rangarajan panel, the differential between costs of imported and domestic urea would come down, making the new policy superfluous.

At present urea is sold at an administered price of Rs 5,310 per tonne, while remunerative price for the companies would be more than double this. The widening differential between the remunerative price for the industry and the MRP along with the high cost of imported urea (imports account for a quarter of domestic consumption of the fertiliser at present) are the reasons why the subsidy bill has increased exponentially in recent years.

In Budget 2013, the fertiliser subsidy was estimated at Rs 60,974 crore, including Rs 13,398 crore for imported urea, Rs 19,000 crore for indigenous urea and Rs 28,576 crore for the sale of decontrolled fertilisers (DAP, MOP and complexes). The fertiliser industry has sought an additional subsidy payments of Rs 40,000 crore in this fiscal.

The government recently constituted a group of ministers (GoM) headed by agriculture minister Sharad Pawar to look into urea pricing. The GoM will also include finance minister P Chidambaram, fertiliser minister MK Alagiri and oil minister M Veerappa Moily.

There has been no significant investment in urea capacity in a decade in India. Encouraged by the new investment policy on the cards, eight companies have expressed their intent to set up new plants of 1.2 million tonnes each, at an estimated cost of Rs 4,200 crore per plant. These include Rashtriya Chemicals & Fertilizers, Tata Chemicals, Indo Gulf Fertilisers, Nagarjuna Fertilisers & Chemicals, Chambal Fertilisers, Iffco, Gujarat Narmada Valley Fertilisers Company and Gujarat State Fertilisers & Chemicals. Industry sources said implementing the Rangarajan panel suggestions could derail these investment proposals, prompting companies to step back, unless the government explicitly ensures higher subsidy payments.

The price of gas from the once-prolific Krishna-Godavari block off the Andhra coast (where the output has seen a sharp decline) is slated for review by an empowered group of ministers in 2014. The current price of $4.20/mmBtu was fixed in 2007 and implemented from 2009 for a five-year period.

With gas production from the KG-D6 block expected to fall further from existing 24 million standard cubic metres per day (mmscmd) to 18 mmscmd next year, the fertiliser ministry wants to protect the fuel allocation for the sector it presides over. The government has originally given the highest priority in allocating gas to fertiliser units, allocating 15.35 mmscmd of gas from the KG-D6 block to the existing gas-based fertiliser plants. Power and city gas are among the other sectors that are allocated gas. Almost 20 gas-based fertiliser plants are facing difficulties due to scarcity of natural gas, with few plants being fired by the more expensive naphtha fuel.